In the second of our series on the budget approval process, we are looking at specific areas to look at which can ease the approval process and ensure a more accurate budget and a profitable following year.
NB: This is an article from Global Asset Solutions
The most important consideration overall is to remember that a hotel never has the same year twice. This feels particularly true now, as trading looks to even out after the lifting of Covid restrictions, but in fact, will have been true for the lifetime of the property.
Subscribe to our weekly newsletter and stay up to date
Factors outside your control, such as being in an in-demand location, hosting a sporting event, or even a change in weather, can mean that one year can look very different from another.
When taking guidance from the past year, it is important to set aside all the one-off events which took place in the current year and identify the one-off events in the budgeted year, then do a waterfall analysis to identify whether all the one-off events are isolated. This will give you a clear view of the actual revenue increase and how realistic it is. Do the same with the one-off costs.
Here, the Asset Manager should always review their monthly asset management reports of the past one or two years. We need to identify key events, challenging months, mistakes, and other events that impacted the P&L. Using this information is crucial to improve performance. For instance, if the executive team failed to rapidly lower their costs after the high seasons, we should warn the team to put a Profit Protection Plan in place before repeating the same mistake in the upcoming year.
Ask for a comparison per hotel department where you will exclude the mandatory pay rise and the bonus effect. You have to isolate each case as this will help you to understand the cost structure better. For example, if you had three employees on sick leave last year and had to replace them with additional staff while their salaries were paid, you should present some savings in the new budget. On the other hand, if you budget for additional occupancy, you will need to book for higher maids.
An area which is often overlooked is the breakfast cost and allocation. It can have a significant impact because usually, the operators would rather allocate a small amount of the breakfast revenue to the F&B, keeping the rest in the ADR. This way, they inflate their RevPar and, consequently, the RGI, which is usually part of the performance test. Additionally, some of them have special fees on the Room Revenue, therefore, by including in the ADR a higher amount of the sold package (it is not only breakfast, but any package), they earn higher fees.
Nevertheless, when one makes this calculation should also have in mind the VAT applied to the F&B, which in some countries is higher compared to the rooms; hence it might make sense to have a lower allocation. If the hotel sells on net rates, then the allocation should be done in a way to take into consideration all the above and guarantee the best profitability for the Owner. In any case, it doesn’t make sense to have low rates which don’t even cover the direct costs (F&B, payroll etc.), as it creates wrong alarms about the F&B profitability and, in case of a tax inspection, can end up with fines.
